Product Pricing: Single Product Presented is the 2017 contribution income statem
ID: 2518150 • Letter: P
Question
Product Pricing: Single Product
Presented is the 2017 contribution income statement of Grafton Products.
GRAFTON PRODUCTS
Contribution Income Statement
For Year Ended December 31, 2017
Sales (13,000 units) .................................... $2,925,000
Less variable costs
Cost of goods sold ................................... $780,000
Selling and administrative.............................. 208,000
(988,000)
Contribution margin .................................... 1,937,000
Less fixed costs
Manufacturing overhead............................... 780,000
Selling and administrative.............................. 315,000
(1,095,000)
Net income ........................................... $ 842,000
During the coming year, Grafton expects an increase in variable manufacturing costs of $12 per unit
and in fixed manufacturing costs of $39,000.
Required
a. If sales for 2018 remain at 13,000 units, what price should Grafton charge to obtain the same profit
as last year?
b. Management believes that sales can be increased to 16,000 units if the selling price is lowered to
$200. Is this action desirable?
c. After considering the expected increases in costs, what sales volume is needed to earn a profit of
$254,800 with a unit selling price of $200?
Explanation / Answer
Answer
Unit
per unit
Amount
Sales
13000
$225
$2925000
(-) variable cost of Goods sold
13000
$60
$780000
(-) Variable selling & admin
13000
$16
$208000
Contribution margin
13000
$149
$1937000
(-) Fixed Cost:
manufacturing
$780000
selling & administrative
$315000
Net Income
$842000
In Coming Year:
Variable cost in coming year [60 +16 + 12]
$88 per unit
Fixed cost in coming year [780000+315000 + 39000]
$1,134,000
Let the sales price per unit be ‘x’, then
13000x[Sales] - (13000x$88)[Variable cost] - 1134000[Fixed cost] = 842000 [Net Income]
13000x - 1144000 - 1134000 = 842000
13000x = 842000 + 1144000 + 1134000
13000x = 3120000
x = 3120000 / 13000
x = $240 per unit = Sale price per unit
Unit
per unit
Amount
Sales
16000
$200
$3200000
(-) variable cost of Goods sold
16000
$72
$1152000
(-) Variable selling & admin
16000
$16
$256000
Contribution margin
16000
$112
$1792000
(-) Fixed Cost:
manufacturing
$819000
selling & administrative
$315000
Coming year expected Income
$658,000
Current Year Income
$842,000
Increase (Decrease) in Income
$(184,000)
Since, expected income in coming year is decreasing by $184,000, the action suggested is not desirable.
Let the sales volume be ‘x’ number of units, then
200x[Sales] - ($88 x 'x')[Variable cost] - 1134000[Fixed cost] = 254800 [Net Income]
200x - 88x - 1134000 = 254800
112x = 254800 + 1134000
112x = 1388800
x = 1388800 / 112
x = 12400 units = Sale Volume in Unit for desired profit of $254,800
Unit
per unit
Amount
Sales
13000
$225
$2925000
(-) variable cost of Goods sold
13000
$60
$780000
(-) Variable selling & admin
13000
$16
$208000
Contribution margin
13000
$149
$1937000
(-) Fixed Cost:
manufacturing
$780000
selling & administrative
$315000
Net Income
$842000
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